Nemaska Lithium Inc fka NMKEF

[HowardHughs]

Peter Arendas:"the sky is the limit" for Nemaska "If the lithium prices grow"
Sep. 12, 2018 1:19 PM ET

https://seekingalpha.com/article/4205800-fully-funded-lithium-mine-developer-trading-27-percent-projects-tax-npv

Nemaska Lithium

A Fully Funded Lithium Mine Developer Trading At 27% Of Its Project's After-Tax NPV

"the lithium hydroxide will be important for Nemaska Lithium. Lithium hydroxide is a premium product that commands higher prices compared to lithium carbonate. As of September 7, the carbonate cost approximately $16,500/t (cif) or $12,000/t (exw), while the hydroxide price was around $19,500/t (cif) or $17,800/t (exw). Moreover, Nemaska should become the World lowest cost and biggest lithium hydroxide producer (chart below). Nemaska should be able to produce lithium hydroxide at a cost of $2,811/t and lithium carbonate at a cost of $3,403/t."

"The initial CAPEX is estimated at C$801 million ($616 million). Using the lithium hydroxide (exw) and lithium carbonate (exw) prices of $14,000/t and $11,719/t respectively, the resulting after-tax NPV(8%) equals to $1.8 billion and the after-tax IRR equals to 30.5%. The current corporate presentation shows also NPV and IRR reflecting the structure of the C$1.1 billion ($840 million) financing package. Although the NPV has declined slightly, to $1.7 billion, the IRR has increased to 56%.

Although the mine and electrochemical plant construction should cost only $616 million, Nemaska Lithium has raised some additional money to cover the interest payments, working capital needs and also to have some reserve for unexpected events. The financing package consists of the abovementioned equity financing worth C$454 million, a $150 million lithium stream and $350 million of senior secured bonds that bear an interest rate of 11.25%. Based on the lithium stream agreement, Orion Mining Finance will receive 14.5% of all lithium hydroxide and carbonate produced at Nemaska's Shawinigan electrochemical plant. Orion will subsequently pay to Nemaska 40% of proceeds from the sale of the products. In other words, Orion will receive approximately 8.7% of Nemaska's sales. Although the volume of products deliverable under the stream agreement is capped at 5,000 tonnes, the stream is very favorable for Orion. Given the structure of the lithium stream, Orion should recover its initial investment pretty quickly (in less than 5 years if the current lithium prices prevail) and it will be collecting net profits for the remaining 3 decades of operations.

The mine and the electrochemical plant construction is well underway. The project is fully permitted and fully funded and the pilot plant has shown that the whole concept is working well. Nemaska Lithium has closed off-take agreements with several partners including Johnson Matthey (OTCPK:JMPLF), LG Chemical (OTCPK:LGCLF), FMC (FMC) or Northvolt. Moreover, as a bonus, it has closed also an off-take agreement for the spodumene concentrate. It means that the spodumene concentrate that should be produced at the Whabouchi mine from Q3 2019 will generate some cash-flows before the Shawinigan electrochemical plant is fully ramped-up, probably in late 2020 or early 2021. The revenues from the spodumene concentrate sales will further de-risk the project as they will create a buffer to cover some unexpected cost overruns or construction delays. In other words, the main risks are related to the lithium market itself right now.

The lithium market
The lithium prices have experienced a steep growth in 2017 (chart below), mainly due to the growing demand of battery producers. However, a steep growth of demand for lithium has been expected for some time and as a result, several projects should start lithium production in the coming years. As a result, especially the spodumene concentrate prices should decline in the near future. On the other hand, the hydroxide and carbonate prices should do relatively well, continually rising during the whole 2020's. This is probably a more optimistic view.

There are also some opinions stating that the fear of lithium oversupply that helped to push the lithium prices down may actually help to avoid the oversupply. As the new projects need to be financed, the current lithium market weakness may limit the amount of money flowing into the lithium mining sector notably. If some of the projects are postponed or suspended, the projected lithium oversupply may turn into a deficit quite easily.

Of course, the higher lithium prices, the better for Nemaska Lithium. However, as shown in the abovementioned charts, Nemaska is expected to become the lowest-cost lithium hydroxide producer by far. And it should be relatively comfortably positioned right in the middle of the lithium carbonate cost curve. It means that even if the lithium prices experience a dramatic decline, Nemaska Lithium should be profitable also in a situation when its competitors are bleeding heavily. Nemaska's debt of $350 million shouldn't be a problem. Even at notably lower lithium prices, Nemaska should be able to repay or refinance it relatively easily.

Conclusion
Nemaska Lithium presents a big opportunity, at its current share price of $0.54 and market capitalization of $457 million. Its assets are located in Canada, the project is fully permitted and fully funded, the off-take agreements are already signed and the construction is well underway. The main risk is related to the lithium price development right now, however, given that at the current lithium prices the after-tax NPV(8%) of the project is approximately $1.7 billion, there is a huge margin of safety for the new investors. The downside risk is pretty limited, given the huge gap between the market capitalization and the NPV of the project. If the current lithium prices prevail, Nemaska Lithium's share price should grow at least by 300% over the next 2-3 years. If the lithium prices grow, the sky is the limit.

Disclosure: I am/we are long NMKEF.